Economic Scene; Rich nations have been too insensitive to poverty for too long; the situation can no longer be ignored.

By Jeff Madrick

Published: November 1, 2001

Correction Appended

FEW would dispute that terrorism and violent religious fundamentalism, however complex their causes, grow best in the soil of poverty. The Sept. 11 attacks raise this issue to a new level of importance. More than any other single event, the attacks show how interconnected the world truly is. High on the new agenda has to be attention to the world's poor.

But in recent years, a sense of futility has developed. Despite glowing optimism 20 years ago, the rich nations' record in raising the developing world to a minimal level of material well-being has been nothing short of disaster. In 1983, the World Bank predicted that developing nations' average gross domestic product would grow 3.3 percent a year over 15 years. In fact, it barely grew at all.

The extent of poverty remains shocking. There has been a modest decline in the portion of those who are poor, but in absolute numbers, they have risen sharply. About a third of the world lives on the equivalent of about $2 a day. In 1820, the richest country had only three times as much income per person as the poorest; today, the richest nation has 30 times the income.

Rich nations are shamefully stingy about aiding the poor, but none more so than the United States. In 1999, the World Bank reported that the United States gave 0.1 percent of its economic output for development, or $9.1 billion, the lowest proportion among the 30 or so wealthiest nations. Japan gave more than $15 billion -- still skimpy, but 0.35 percent of its output. Moreover, America stipulates that about two-thirds of the $9 billion must be spent on American products.

Some critics say that money is not the issue, that the record of poor nations is an inevitable result of debilitating cultural attitudes. Time and again, such cultural stereotypes have been defied. Malaysia, a Muslim nation, is a great economic success. Catholic France has a higher standard of living than Anglican England, with its celebrated Protestant work ethic. China has grown rapidly, but it essentially eschews private property.

Far more likely, development policies in the last few decades have repeatedly been wrongheaded. In a recent controversial book, ''The Elusive Quest for Growth'' (MIT Press), William Easterly, a World Bank economist, traces the history of these failures.

To take just one of Mr. Easterly's many examples, capital investment in plant and equipment was once thought to be the main source of growth for developing economies. Both Nigeria and Hong Kong dutifully raised their investment in capital stock per worker by 250 percent from 1960 to 1985. But Nigeria's output per worker, or productivity, rose only 12 percent, while Hong Kong's soared 328 percent. Clearly, something else was also driving growth.

About that something else, however, economists have long been divided. In the early 1980's, the World Bank insisted the failures had to do with inflationary and protectionist policies. They insisted that countries to which it lent adopt reforms -- ''neo-liberal'' policies like restrained government spending to control inflation, free trade to foster competition and deregulation to allow free markets to allocate resources.

The average record of success was poor. Mr. Easterly says the reason is largely that the bank lent money regardless of whether the reforms were made. Nations that adopted reforms, he maintains, did fairly well.

But there is an alternative body of literature that asserts that neo-liberal policies are at best only part of the answer. A new book, ''The Rise of 'the Rest' '' (Oxford University Press), by Alice H. Amsden, an economist at the Massachusetts Institute of Technology, asserts that the recent success of many developing countries required an extensive role for government in supporting business.

Similarly, neo-liberal policies have done damage. Lance Taylor, a professor at New School University, has edited a new volume of case studies, ''External Liberalization, Economic Performance, and Social Policy'' (Oxford University Press), which says that neo-liberal policies have not merely had mixed results but almost invariably led to more income inequality.

Indeed, Argentina was a textbook example of a country that adopted neo-liberal policies a decade or so ago. For a while, they seemed to work, but now the country is reeling from recession and is in danger of defaulting on its international debt.

Perhaps the best-known critic of overreliance on market policies to stimulate economic growth has been Joseph E. Stiglitz, the former chief economist of the World Bank and one of three winners of this year's Nobel in economic science. In a series of speeches at the World Bank, many of which are collected in a new volume, ''The Rebel Within'' (Anthem WorldEconomics), Mr. Stiglitz argues that a broad range of factors affect economic growth, including education and the quality of financial institutions, which often require financing and regulation by government.

What is important, however, is that even though all these critics now acknowledge that economic development is harder than many once thought it was, none think it is futile. Rather, two important lessons have been learned in the last two decades. Sound economic development cannot depend solely on markets or solely on government. Mr. Easterly agrees. Both effective market incentives and social programs supporting health, education, infrastructure and poverty reduction are usually required.

Second, each country is different. There is no fixed recipe of ingredients that will assure growth. In some, an investment in education is a priority, in others investment in health or transportation infrastructure, in still others a reduction in taxes or government policies to promote export industries will matter most at a given moment.

The real danger is not a lack of good ideas, but a refusal to try them. Here there are two important limitations. First, although both the World Bank and the International Monetary Fund have tempered their advocacy of neo-liberal policies, they are still inclined to demand a single set of reforms from most nations. This lock on policy must be broken.

And, second, finance. Those who think that money for development cannot be spent wisely, says Mr. Easterly, merely lack imagination -- tragically so, I would add.

It's time for the rich world to cough up some serious money for the poor.

Chart: ''Too Stingy?'' The United States ranks behind other developed nations in terms of how much of its economy it devotes to development aid. Figures are for 1999. The Netherlands PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.79% DOLLARS, IN MILLIONS: $ 3.1 France PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.39% DOLLARS, IN MILLIONS: 5.6 Japan PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.35% DOLLARS, IN MILLIONS: 15.3 Germany PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.26% DOLLARS, IN MILLIONS: 5.5 Britain PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.23% DOLLARS, IN MILLIONS: 3.4 United States PERCENTAGE OF GROSS NATIONAL PRODUCT: 0.10% DOLLARS, IN MILLIONS: 9.1 (Source: World Bank)

Jeff Madrick is the editor of Challenge Magazine and a collection of essays, ''Unconventional Wisdom: Alternative Perspectives on the New Economy.'' He teaches at Cooper Union and the New School. E-mail: challenge@mesharpe.com.

Correction: November 10, 2001, Saturday A chart with the Economic Scene column in Business Day on Nov. 1 showing the percentage of economic output spent by nations on development aid to poor countries mislabeled the dollar figures. They were billions, not millions.